Readers of this column know it has favoured two core themes in the past 18 months: higher exposure to housing-related companies; and lifting allocations to international equities, principally in the US. The second theme is paying off as the Australian dollar falls.

Other themes have also been pursued: exposure to food-related companies that will benefit from middle-class growth in Asia; healthcare and aged-care stocks; and, more recently, the wealth managers that will benefit from rising equity markets in the medium term.

International equities have been a key theme for three reasons. First, Self-Managed Superannuation Funds (SMSF) are badly underweight internationally, with only a tiny fraction of the equities component of their portfolio invested outside of Australia. From a diversification stance, the case to lift offshore equities exposure is compelling.

Second, I liked the prospects for the US economy and. Although there are pockets of strength in the Australian economy, notably housing, it has a challenging year ahead as the mining investment boom fades.

Finally, the Australian dollar looked overvalued, trading near parity with the Greenback last year. I believed commodity prices had a lot further to fall and would eventually bring the Australian dollar back to more realistic levels. A bearish view on commodities was the main reason this column had mostly avoided resource stocks in the past two years.

Who knows how far the Australia dollar will retreat? It is down from almost US95 cents in July to US87 cents this week, and looks like it is in a hurry to get below US85 cents. The falling iron ore price, fears about slower-than-expected Chinese growth, and the prospect of higher interest rates in the US next year have pushed our dollar lower – much to the relief of exporters.

AMP Capital chief economist Dr Shane Oliver wrote last week: “The Australian dollar is continuing to slide, helped by an ascendant US dollar, the continuing slide in the iron ore prices (now down 41 per cent year to date) and the possibility that the use of macro-prudential controls to slow the housing market will further delay the first rate hike in Australia … I remain of the view that by year end the Australian dollar will have fallen through the January low of $US0.8660 on its way to around $US0.80 over the next year or so. A lower Australian dollar will help rebalance the economy.”

One certainty is that commodity prices have a history of surprising people on the way up, and down. That is, the market underestimates the strength of commodity price booms – as happened in 2008-2010 – and underestimates how far commodity prices can fall. It’s hard to find too many factors driving the Australian dollar back towards parity with the Greenback in the next six months.

If that scenario plays out, a lower Australian dollar and slowing local economy strengthens the case to lift allocations to international equities. Next year looks like one of the trickiest for Australian companies and boards in a long time as demand slows.

My preferred instrument for US equities exposure has been the iShares Core S&P 500 ETF. This low-cost exchanged-traded fund aims to replicate the price and yield returns of the S&P 500 index in the US and is unhedged for currency movements. This ETF is up 19 per cent over one year to August 31, 2014, and has a three-year average annualised return of 26 per cent. It will benefit as the Australian dollar falls, provided US equities hold their ground.

Chart 1: iShares Core S&P 500 ETF

Source: ASX

I also identified the iShares Global 100 ETF in July 2013 as a smart way to play the boom in Asian middle-class consumers. Buying multinational companies that benefit from growth in stgeloping nations seemed a better bet than punting on volatile emerging markets. The SPDR S&P World ex-Australian Fund (unhedged) was also mentioned for consideration.

The iShares Global 100 ETF is up 13 per cent over one year to August 2014 and has a three-year annual return of 19 per cent. I foolishly overlooked its sister ETF – the iShares Global Healthcare ETF – which is up 22 per cent over one year and 29 per cent annually over three.

Chart 2: iShares Global 100 ETF

Source: ASX

I rate the iShares Global 100 ETF for a few reasons. First, it provides international equities exposure without punting on a single market or sector, and includes multinationals such as Apple Inc, Exon Mobil, Microsoft and Johnson & Johnson. Some of its key stock exposures are in sectors poorly represented on ASX.

The ETF’s simplicity and low cost is another attraction. Management costs are just 40 basis points and the iShares Global 100 ETF is bought or sold like shares via ASX. Like all iShares ETFs, the lack of currency hedging, as the Australian dollar falls, is an attraction.

Currency hedging, of course, works both ways. Investors who held international equities (in unhedged currency terms) when the Australian dollar rose and offshore equities markets fell suffered horrendous losses. Always remember that an investment in an unhedged ETF is a bet on the underlying securities and the direction of the base currency.

The iShares Global 100 ETF has good prospects if your medium-term view is a lower Australian dollar – possibly closer to US75 cents within two years – and continued strength in US multinationals. Growth in Asian middle-class consumers and the ETF’s 20 per cent weighting in technology stocks (its highest sector weight) add further appeal.

•    Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their financial adviser before acting on themes in this article. All prices and analysis at October 2,  2014.

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